Quick Answer
Conventional mutual funds redeem on demand within 7 calendar days at NAV. Closed-end funds and ETFs trade continuously on an exchange instead, though authorized participants still create and redeem ETF shares directly with the fund. Private funds (hedge funds, PE, VC) and non-traded REITs are the least liquid, often locking up capital for a year or more.
The liquidity difference is not just a convenience issue; it drives what an adviser can suitably recommend to a client who may need access to the money on short notice.
How Liquid Are Open-End Funds (Mutual Funds)?
- Redeemable on demand - fund must buy back shares at NAV
- Must fulfill redemption requests within 7 calendar days
- Forward pricing: all orders priced at the next calculated NAV (computed once daily after 4:00 PM ET)
- Cannot be purchased on margin or sold short
How Liquid Are Closed-End Funds?
- Trade on exchanges (NYSE, Nasdaq) like stocks - continuous intraday pricing
- No redemption right with the fund; must sell on secondary market
- Can be purchased on margin and sold short
- Liquidity depends on trading volume
How Liquid Are ETFs?
- Trade on exchanges throughout the day like stocks
- Creation/redemption mechanism via authorized participants (APs) keeps price near NAV
- Can be purchased on margin, sold short, and traded with limit/stop orders
- Generally highly liquid (except niche or thinly traded ETFs)
How Liquid Are Unit Investment Trusts (UITs)?
- Redeemable with the trust (like open-end funds) at NAV, calculated once daily (forward pricing)
- Less liquid than mutual funds; some UITs have limited secondary markets, where units trade at a market price that can differ from NAV instead of the trust's NAV redemption price
How Liquid Are Private Funds (Hedge Funds, PE, VC)?
- Highly illiquid - subject to lock-up periods (often 1-2 years)
- Redemption restrictions (quarterly or annual windows with advance notice)
- Not traded on any exchange
Exam Tip: Gotchas
- "Lock-up period" signals a private fund, not a mutual fund. Mutual funds must redeem within 7 calendar days by law; hedge/PE/VC funds can restrict redemptions for a year or more. If a question mentions lock-ups, gates, or quarterly redemption windows, the answer is a private fund.
How Liquid Are Non-Traded REITs?
- Extremely illiquid - no public exchange for trading
- Redemption programs limited and may be suspended
- Often require holding periods of 5-7+ years
How Do the Vehicles Compare on Liquidity?
| Vehicle | Liquidity | Pricing | Margin/Short |
|---|---|---|---|
| Open-end fund | High (7-calendar-day redemption) | Once daily (forward) | No |
| Closed-end fund | Exchange-traded | Continuous (market) | Yes |
| ETF | Exchange-traded | Continuous (market) | Yes |
| UIT | Redeemable with trust | NAV (redemption) or market (resale) | No |
| Hedge fund | Low (lock-up periods) | Periodic (quarterly) | N/A |
| Non-traded REIT | Very low | Periodic appraisal | No |
Exam Tip: Gotchas
Open-end mutual funds use forward pricing - an investor placing an order at 2:00 PM receives that day's 4:00 PM NAV. An order placed at 4:01 PM receives the next business day's NAV. The exam frequently tests this timing rule.
What Should You Check on Exam Day?
- Open-end funds must redeem within 7 calendar days at the next calculated NAV; they cannot be bought on margin or sold short.
- Closed-end funds and ETFs trade continuously on an exchange and can be margined or shorted, but only ETFs have a creation/redemption mechanism that keeps price near NAV.
- A UIT redeems with the trust at NAV, but any secondary-market resale happens at a market price that can diverge from NAV.
- Lock-up periods, gates, and quarterly redemption windows point to a private fund, not a mutual fund.
- Non-traded REITs are the least liquid vehicle on this list, with holding periods often running 5-7+ years and no guaranteed redemption.